Macroeconomics: Schools Of Thought
AAA
  1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion
Macroeconomics: Schools Of Thought

Macroeconomics: Schools Of Thought

By Stephen Simpson

The field of macroeconomics is organized into many different schools of thought, with differing views on how the markets and their participants operate.

Classical
Classical economists hold that prices, wages and rates are flexible and markets always clear. As there is no unemployment, growth depends upon the supply of production factors. (Other economists built on Smith's work to solidify classical economic theory. For more, see Adam Smith: The Father Of Economics.)

Keynesian
Keynesian economics was largely founded on the basis of the works of John Maynard Keynes. Keynesians focus on aggregate demand as the principal factor in issues like unemployment and the business cycle. Keynesian economists believe that the business cycle can be managed by active government intervention through fiscal policy (spending more in recessions to stimulate demand) and monetary policy (stimulating demand with lower rates). Keynesian economists also believe that there are certain rigidities in the system, particularly "sticky" wages and prices that prevent the proper clearing of supply and demand.

Monetarist
The Monetarist school is largely credited to the works of Milton Friedman. Monetarist economists believe that the role of government is to control inflation by controlling the money supply. Monetarists believe that markets are typically clear and that participants have rational expectations. Monetarists reject the Keynesian notion that governments can "manage" demand and that attempts to do so are destabilizing and likely to lead to inflation. (Learn how Milton Friedman's monetarist views shaped economic policy after World War II. For more, see Monetarism: Printing Money To Curb Inflation.)

New Keynesian
The New Keynesian school attempts to add microeconomic foundations to traditional Keynesian economic theories. While New Keynesians do accept that households and firms operate on the basis of rational expectations, they still maintain that there are a variety of market failures, including sticky prices and wages. Because of this "stickiness", the government can improve macroeconomic conditions through fiscal and monetary policy.

Neoclassical
Neoclassical economics assumes that people have rational expectations and strive to maximize their utility. This school presumes that people act independently on the basis of all the information they can attain. The idea of marginalism and maximizing marginal utility is attributed to the neoclassical school, as well as the notion that economic agents act on the basis of rational expectations. Since neoclassical economists believe the market is always in equilibrium, macroeconomics focuses on the growth of supply factors and the influence of money supply on price levels.

New Classical
The New Classical school is built largely on the Neoclassical school. The New Classical school emphasizes the importance of microeconomics and models based on that behavior. New Classical economists assume that all agents try to maximize their utility and have rational expectations. They also believe that the market clears at all times. New Classical economists believe that unemployment is largely voluntary and that discretionary fiscal policy is destabilizing, while inflation can be controlled with monetary policy.

Austrian
The Austrian school is an older school of economics that is seeing some resurgence in popularity. Austrian school economists believe that human behavior is too idiosyncratic to model accurately with mathematics and that minimal government intervention is best. The Austrian school has contributed useful theories and explanations on the business cycle, implications of capital intensity, and the importance of time and opportunity costs in determining consumption and value. (For related reading, see The Austrian School Of Economics.)

Macroeconomics: Microeconomics Foundation

  1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion
Macroeconomics: Schools Of Thought
RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Global Recession

    An extended period of economic decline around the world. The ...
  3. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  4. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  5. Event Risk

    1. The risk due to unforeseen events partaken by or associated ...
  6. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...
  1. Are oil prices and interest rates correlated?

    Yes. No. Maybe. Definitely. There's no easy answer to this question. While many theories abound, the reality is that oil ...
  2. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ...
  3. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ...
  4. What is the Mont Pelerin Society?

    The Mont Pelerin Society was formed in 1947 when economist Friedrich von Hayek invited 39 people to meet at Mont Pelerin ...
comments powered by Disqus
Related Tutorials
  1. Ethical Investing Tutorial
    Fundamental Analysis

    Ethical Investing Tutorial

  2. Economics Basics
    Economics

    Economics Basics

  3. Investing For Safety and Income Tutorial
    Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  4. The Federal Reserve
    Economics

    The Federal Reserve

  5. Capital Budgeting
    Investing Basics

    Capital Budgeting

Trading Center